Author: johnredwood

          The Spending Statement  concentrated on spending totals for 2015-16. The government does need to plan ahead. The Coalition government will preside over the first two months of the financial year 2015-16. The new government elected in 2015  may continue with the year’s spending plans for the rest of  the year, or could decide to have a summer budget to make adjustments.

         The Announcement seems to have be greeted by agreement between all three main parties  in the Commons that the totals are correct. Labour did not wish to propose spending  and borrowing any more. Labour never suggests spending less overall. A Lib Dem Chief Secretary undertook much of the Minsisterial level work to get the Statement agreed. It was signed off by both the PM and his Deputy.

          Labour’s position is to say that whilst they accept the totals of spending, they disagree with the detail and the priorities. I look forward to hearing more from them nearer the election over how they would shift the  budget around within the agreed totals. It is helpful to know that they, like the Coalition, think a cash increase of 2% is as much as can be afforded.

        The durability of these totals may be high from the political point of view, but it could be tested by the markets and by future economic changes.  The Green Book backing the Statement centres around the reduction in the deficit. To cut the deficit the government both needs higher tax revenues from growth as well as controlled increases in spending under these plans.

           If growth starts to outperform the reduced forecasts it would be good to think extra revenue will be used to cut the deficit faster, rather than triggering a hunt for ways to spend more money. If growth were to disappoint again owing to say another severe phase to the Euro crisis or from a continuing failure of banks to finance the recovery in various parts of the world the government would also have to revisit the strategy and make some more difficult decisions.

          The development of the detailed thinking on the welfare cap will be important. So far we learn that they wish to strengthen job search by unemployed people and require them to attend Job centres weekly; to require all applicants to improve their spoken English; and asking all lone parents to prepare for work when their child turns three.

        Living within a 2% increase in overall budgets will be much easier if the reforms and effficiency drives set out by the government work well.

      The slim Green Book reveals that total spending will increase 2% in 2015-16 over 2014-15. Within this pensions and welfare spending is forecast to rise  by £15.3bn or 4.45% (AME) whilst departmental expenditures will decline by just  £0.9 bn.(DEL including depreciation).

       The Green book suggests that this will be a real terms reduction of 0.4%. However, with a continuing wage control allowing only 1% pay growth, with productivity gains and with proper control of general inflation, these figures could end up delivering a small real terms increase if properly managed.

The 2012-13 Accounts for Network Rail make interesting reading. This public sector owned company escapes most comment and attention, because Ministers seem to think it is not their responsibility to tell us about its profits and losses or explain in any detail its peformance. It is a so called independent company, but one which in effect is taxpayer owned.

Taxpayers indirectly supply much of its income through the subsidies to the railways, routed into Network Rail via the access charges it places on operating companies. Most in the press seem to ignore what is a most interesting document, accounting for billions of public investment and cost.

Network Rail’s debts now stand at a large £30.3bn, an 11.3% increase over the last year. Operating costs rose by 9.5%, in part reflecting the big increase in capital. Capital expenditure ran at £5050 million for the year, an increase of 9.8%.

The current value of its large portfolio of derivative financial instrument liabilities is a negative £1208 million. Its current value of derivative assets is £673 million. Is this a good portfolio of assets and risks for taxpayers to own? Operating profits fell 5.5% in the year.

At a time when Ministers are planning further increases in rail expenditure, and are keen to promote more railway construction, they would be well advised to examine these accounts. They should be asking why costs went up so much last year, why profits fell, and how the balance sheet is constructed. They should be asking how much more of their planned future programme Network Rail could finance out of improved cashflow from improved financial performance. The debt build up is fast and large.

I am in favour of Network Rail improving its stations and facilities for travellers. I am also in favour of Network Rail financing more of this from property transactions bringing more railway property into more productive use, and harnessing private improvement, finance and development adjacent to the stations and tracks where there is land available.

On the day when the government is going to announce a reduced rate of increase in spending, proper demands for improved efficiency and effectiveness at NR would be a good idea as there is a lot of public money at risk here.

Before Mr Bernanke spoke about the need to curtail and then  stop Quantitative Easing the markets behaved as if there was no cloud in the investment sky. Since he spoke, they have behaved as if we would never see the investment sun again. Both positions seem unrealistic.

As the market declines have continued for longer, we need to ask could the markets talk and move themselves to a crisis?  There is no immediate prospect of the kind of credit crunch and banking crisis in the west that drove the markets down in 2007-8. There is no-one forecasting a recession in the USA to match the crashes of the last decade.  On that basis the  Stock market reactions to higher bond yields looks overdone.

There are some problems out there which in its current mood the world Stock market takes more seriously. There is the trouble on the streets of Turkey and Brazil, once fast growing emerging market economies in favour. In China, still growing at more than 7%, suddenly the authorities seem to want to teach the banks and financial instituutions a lesson about controlling their lending instead of making easy liquidity available. Will they judge that right, or could they start to do damage to the very institutions which power and finance the growth?

Worse still, in Euroland, the markets are now driving up the cost of government borrowing again. For the time being Spain  and Italy will have to pay 1% more to borrow, but the levels are still below the panic levels of the past. However, again market watchers will get more nervous if bond yields continue to rise, placing bigger  question marks over the capacity of these governments to afford the money they need to raise from the bond markets.

The Uk has seen the 10 year cost of borrowing rise from 1.7% to 2.56% yesterday. It’s still low, but means a bit more cost to taxpayers as the government continues to expand its borrowing.

For the time being the markets worries have not done enough to interest rates and to the financial system to cause justified major worries. However, the more they slide, the more we need to look at the collateral damage it does. Mr Bernanke may be pleased with his work, as the US economy is strengthening and he needed to blow away some of the exuberance. He also seems to have knocked parts of the world like Euroland that are still struggling,  and hit emerging market economies that are slowing anyway, which is not such a great result.